Posts Tagged ‘Social Security number’

FEBRUARY 21, 2011 VOLUME 18 NUMBER 6
We get asked plenty of general legal questions. We try to give helpful answers, recognizing that we can not give specific legal advice to non-clients (and particularly to questioners from outside Arizona, where we are licensed to practice law). Often our best answer is “check with a local lawyer familiar with the appropriate area of law.” Unsatisfying, but it really is the right answer in many cases.

Still, we want to get general legal concepts out to the public. Why? Because we think it makes non-lawyers recognize when the legal problem they face is too complex for self-help, and it even helps make the questioner a better client when they do get to the lawyer’s office.

What kind of legal questions can we answer? very general ones. Like these, which are some of our most common questions:

Does my living trust need a new tax ID number? The best way to answer this is probably to explain when a trust doesn’t need its own “Employer Identification Number” (EIN — even if the trust isn’t an “employer,” that’s the kind of tax ID number it will get).

General rule: every separate entity requires its own TIN, whether that is a Social Security number (for you) or an EIN (for your corporation, trust, LLC, or whatever). First major exception to the general rule: if your trust is revocable, and you are the trustee, for tax purposes it is not a separate entity at all — you don’t need an EIN and, in fact, you shouldn’t get one.

Now let’s make it a little more complicated. If your trust is irrevocable, or you are not the trustee, the rules are a little harder to parse. The key question is whether your trust is a “grantor” trust. If it is, and if there is only one grantor (or one married couple), then it does not need an EIN. If it is not, or if there are multiple grantors, it must have its own EIN.

Note that whether or not the trust needs (or is even permitted to get) an EIN is not the same question as whether it has to file a separate tax return. That one is more complicated, and we’ll save it for another day.

Can a revocable trust be named as beneficiary of an IRA? Yes, but be careful. This is something you should discuss with your attorney or your accountant (or both).

Before we talk about naming your trust as the beneficiary, we have a question for you: what are you trying to accomplish by naming the trust as beneficiary? If your trust divides equally and distributes outright among a fairly small number of beneficiaries upon your death, why not just name those beneficiaries on the IRA as well as in the trust? Then you don’t have to figure out the rules on naming a trust as beneficiary, and you don’t have to keep wondering if you’ve done it right.

Maybe you have a child who is ill, or a spendthrift, or needs to have his inheritance placed in trust. In that case — and in a few other cases — it can make sense to name your trust as beneficiary of your IRA. Now you need to become familiar with the difference between what lawyers usually call “conduit” trusts and “accumulation” trusts. The former require distribution of any money received from the IRA’s minimum distribution requirements each year, and the latter allow (but do not require) the IRA distributions to accumulate. The distinction is important; the accumulation trust will require distributions on the basis of the oldest possible beneficiary of the trust. That is the result in most cases where a trust is named as beneficiary.

These same rules apply, by the way, for other tax-qualified accounts, like 401(k) and 403(b) plans. Some advisers will tell you it is not even permitted to name a trust as beneficiary of an IRA or qualified plan. They are wrong, but the rules are a little difficult to figure out in individual cases. Also, some account custodians (that is, the bank or financial institution where the money is held) may limit or even prohibit trusts as beneficiaries.

How does community property work in Arizona? Nine U.S. states are usually listed as the “community property” states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. In addition, Puerto Rico recognizes community property, and Alaska allows couples to choose community property treatment of their joint assets.

But what does it mean to have property held as community property? In Arizona, it means that the property is jointly owned, that each spouse has an equal interest, and that either spouse has the right to manage the property on behalf of the community.

When one spouse dies, his (or her) half int0erest in the community property normally passes according to his will or, if he did not sign a will, to his children (including those who are also children of the surviving spouse). To avoid that result couples are permitted to specifically designate their property as “community property with right of survivorship.” If that title has been used, the surviving spouse receives the entire community asset on the first spouse’s death. Note that the different community property states treat the right of survivorship differently, and we are only describing Arizona’s approach here.

It is also possible for a portion of an asset to be subject to community rights. This might happen, for example, if one spouse brought the property into the marriage but mortgage payments were made during the period of marriage from community income or assets. This kind of calculation is usually much more important in divorce proceedings than upon the death of one spouse.

Property received by inheritance or gift, and property owned before the marriage, are not community property — they are the separate property of the recipient or owner. Couples can choose to convert their community property into separate property, and can even agree that property acquired in the future will be treated as separate property.

Thanks. But I have a different question to ask. Go ahead — pose your question as a comment here, and we’ll try to answer it. Don’t be too surprised if we tell you that it is too specific, or requires knowledge of another state’s laws, or we can’t answer it for some other reason. But we’ll try to be helpful.

One word of caution: do not give us a detailed fact pattern and ask us for advice. We simply can not provide individual legal advice — free or even for a fee — based on unsolicited e-mails or comments. You will not have any lawyer/client privilege for your recitation of the facts, and we will not be able to help with that kind of inquiry. We do welcome your general questions that give us a chance to explain legal principles, though.

Imagine that you are trying to change the title on your bank account into the name of the living trust you and your spouse just set up. The nice lady at the bank is telling you that you need to get a new tax identification number for the trust. Could she be right? In a word, no.

Because we are lawyers, however, it is very hard for us to answer a complex question with a single word. So let us review some of the variations with you.

Is your trust revocable? This is the easiest variation. Give the bank (and your credit union, and your broker) your Social Security number. Joint trust between you and your spouse? No problem. Give them either Social Security number — just like before, when both of your names were on the account as individuals.

What if the trust is irrevocable? This is a little more confusing, but ultimately the answer is probably the same. If you receive any significant benefit from the trust, and your money went into it in the first place, you still use your Social Security number.

Is someone else the trustee of your trust? The answer is still the same — though many bank and brokerage officers will insist that this is what makes it mandatory for you to get a separate tax number. Simply put, they are wrong. If the trust is revocable use your Social Security number regardless of who the trustee might be. If it is irrevocable and someone else is the trustee, but you still receive benefits from the trust, use your Social Security number.

What if the trust is a “special needs” trust set up with your personal injury settlement or other funds? You still use your Social Security number. The “special needs” designation does not change the answer.

What about the “special needs” trust you set up with your money but for the benefit of your child? Now we’re getting interesting. Can you revoke the trust? What happens if your child dies before you do — does the money return to you? In either case, you probably use your Social Security number, and report the income on your tax return. Talk to your accountant and/or lawyer — don’t accept the banker’s (or broker’s) analysis of the legal and tax implications.

Is there ever a time when a new tax ID number is required for a trust? Yes, though the circumstances requiring a separate number are not as numerous as most bank officers, brokers and (for that matter) accountants think. These are not the only situations requiring a new number, but the three most common are:

Life insurance trusts, or so-called “Crummey” trusts. Just because your trust owns life insurance it does not automatically follow that this special rule applies, but if it was set up precisely to own life insurance, and you are not the trustee, it likely needs its own number.

A trust that becames irrevocable because of the death of the person setting the the trust up in the first place. This can happen when one spoue dies and a trust becomes partly irrevocable, too.

A special needs trusts you set up (with your money) for the benefit of someone else, but which does not revert to you if the beneficiary dies before you — especially if you are not even the trustee.

When a separate number is required, what kind of number is it? The actual name for a tax identification number for a trust is “Employer Identification Number” or EIN. That is true even though the trust may not have any employees. The common acronym “TIN” (tax identification number) is not really an IRS or Social Security term at all — it is usually used as an umbrella term to encompass both EINs and Social Security numbers.

Why do bankers and stockbrokers insist that I need a new tax ID number if I do not? We’re puzzled, too. Our best answer: they are reading from a prepared list of choices, and they do not really understand the reasoning behind the various categories and approaches. We have had good experience talking with the bank employee on behalf of our clients, but sometimes it requires working up through the levels of authority.

Did you already get an EIN (Employer Identification Number) for your trust? Is that a problem? Probably not. You have two choices: change the tax identification number on all the accounts back to your Social Security number and file a final income tax return for the trust, or file annual tax returns under the trust’s EIN but without including any income or expenses — list those on your own tax return instead.

There is a lot of confusion in the financial industry about tax identification numbers and trusts. Feel free to print this out and take it to your banker.